Groundbreaking study suggests trademark count, rather than patent count, is a better predictor of innovation 10 Jul 17
A new study by academics at George Washington University has benchmarked the most common innovation proxies, and concluded that the size of a company’s trademark portfolio is a more consistent indicator of innovation than patent count or R&D expenditure. The result adds to the evidence that trademarks hold value beyond simple exclusivity and recognition, with one of the academics telling World Trademark Review that it may indicate that these rights “are actually undervalued”.
The study, entitled “Innovation Worth Buying: The Fair-Value of Innovation Benchmarks and Proxies”, aimed to pinpoint the most accurate proxies for innovation because, as the abstract notes, it is “notoriously hard to measure”. The trademark link to innovation is something we have covered extensively – indeed, we’ve had two magazine cover stories since 2011 on the very subject. Furthermore, we have repeatedly pushed for more research into the area. “Astute trademark counsel know just how valuable their portfolio is; linking their marks to innovation could help them to prove it,” we wrote six years ago. “Backed up by evidence, they could even make a stronger case for increased budget.”
This new study might therefore be a valuable asset for corporate counsel to strengthen that case. The authors, James Potepa and Kyle T. Welch, who are both assistant professors of accountancy at George Washington University, brought together various metrics “to find compelling evidence about the suitable proxies for measuring innovation”. The proxies analysed include patent count, citation-weighted patent count, R&D expenditure, trademark count and the market response to new patents. Each was measured against a ‘dependent variable measure’ (a post-transaction fair value of itemised intangible assets), and the results found that “some do indeed significantly predict firm innovation but that others are less consistent and subject to variations“.
Regarding those that were found to be least consistent at measuring innovation, the authors state that they found “no compelling evidence that three commonly used proxies – patent count, patent citation count, and research and development expenditure – relate consistently and significantly to innovation”. Rather, they note, they “capture the technological inventions already developed”. Those three metrics were therefore “useful”, but “only to measure the advances a firm has already made”.
On the flipside, the two that came out on top are trademark count and the market response to new patents (proposed by Kogan et al, 2017). Regarding the former, the study notes: “Trademarks represent an innovation measure much less covered in the literature, yet they have potential to capture innovation distinct from patents. [The results show that] trademarks are positively and significantly associated with innovation.”
Talking further with World Trademark Review, Potepa further explained why he thinks trademark count is a better proxy for innovation than patent count. “First, the value of patents represents technology already developed whereas trademarks represent a combination of recognition and what customers anticipate the firm to develop in the future. Second, many firms prefer to keep advances under wraps by relying on the Uniform Trade Secrets Act; since patents would necessarily give away details to potential competitors, firms may choose not go this route. Regardless of the approach taken (patent or not), trademarks help firms capitalise on advances but not necessarily provide so much information that competitors can replicate the technology. Finally, many innovative firms are moving towards open source approaches; for example, Alphabet's Android operating system is open source, so patents would not be a good way to measure the innovation associated with Android, but clearly everyone knows this trademarked operating system.”
He further argues that the study should be essential reading for those in the trademark community, stating: “It is clear that having a recognisable name and an associated reputation is valuable, but our evidence indicates trademarks are able to pick up something above and beyond the value of recognition. Trademarks can actually predict the value of a firm's expected future advances, which is amazing but not entirely surprising. In fact, it is worth considering whether trademarks are actually undervalued.”
Of course, this is just one study and more work will need to be done to find the ‘holy grail’ of an agreed measure of innovation. Potepa notes that his initial purpose to “establish the proper way to measure innovation”, and hopes that future researchers now have “the right tools to answer questions about this important topic”. But it appears that these findings reveal that trademarks play a more crucial role in measuring innovation than was previously thought.
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